Linear Regression Research Paper on Determinants of Import Across Countries

A fiscal deficit is when a government's total expenditures exceed the tax revenues that it generates. A budget deficit can be cut by either reducing public expenditure or raising taxes. In this essay, I am going to analyse the benefits and costs of increasing tax rates to reduce fiscal deficits instead of cutting government expenditure.

The general standard for measuring the overall size of the nation's economic activity is the value of gross domestic product (GDP). One of the components of GDP is a measure of the value of exports and imports of goods and services. The hitch is that GDP includes a large component of non-tradable that does not or cannot enter into international trade flows to any significant degree-for example, most buildings and structures, and personal and government services. Consequently, even though internationally traded items such as financial services and travel and transportation services are included in GDP, when we compare the size of the foreign sector with the size of the domestic economy, we end up comparing apples with apples and pomegranates. As a result, comparing exports or imports of goods and services to GDP may understate the importance of international trade to relevant sectors of the domestic economy

International trade affects the economy by increasing the Aggregate Demand (AD), and by becoming a source of inputs for production. International trade based on the theory of comparative advantage will improve efficiency in allocating resources, as well as allow businesses to reach economies of scale - "the situation in which costs per unit of output fall as output increases", consequently reaching competitive prices of international markets (Colander, 2004, p. 428). When an economy involves itself in trade, under the right circumstances, it is able to shift the Production Possibility Curve (PPC) curve outward, and achieve greater levels of output. This increase in production can be achieved through the use of more resources

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

The Complete Idiot's Guide to Economics © 2003 by Tom Gorma Retrieved on February 27, 2012 http://www.infoplease.com/cig/economics/effect-imports-exports-gdp.html

Many indicators serve to measure the degree of trade openness. The first is designed to assess directly the level of economy openness to foreign trade. The degree of openness measures the level of the external constraint and it is obtained by the ratio of the value of foreign trade on the GDP. The second indicator (distortion) aims to measure the impacts of protectionist policies of a country.

A country needs to export more than import in order to maintain a good working economy. Wealth and power equal more export than import in a country’s trading system

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

Foreign demand for a primary product may also limit economic growth as demand for a particular commodity will cause an increase in demand for a country’s currency, thus resulting in the appreciation of the currency. This would reduce the competitiveness of the country’s manufactured exports, thus leading to a decrease in the financial resources gained from exports which could have enabled the country to raise the level of economic welfare to encourage development.

Some of the countries with surplus commodities may dumb them on international markets at a low price. Under such conditions, some of the efficient industries can might find difficulties in competing for long period. Furthermore, countries whose economies are mostly rural will face unfavourable terms of trade. For example, ration of export prices to import prices. Which means that their export income is more smaller than their import payments the make for high value added imports, as it leads to subsequently large foreign debt levels.

     International trade has been in existence throughout history and has an economic impact on the participating countries. Trade in most countries has a share of the Gross Domestic Product (GDP) and helps to boost the

The issue at hand is the elasticity of imports and exports in Asian countries and why the import and export demand elasticities are not constant as one would think. Import and export demand can change the price and income variables of a country. The study found that in Asian countries, if imports are price inelastic there will be a rise in import prices and will lead to an increase in the import bill. If imports of these countries are income elastic, an increase in incomes will lead to a more proportionate increase in imports. If exports from Asian countries are price inelastic, export earnings will rise as the prices increase. If exports from these countries are income elastic, an increase in incomes worldwide will lease to a greater than proportionate increase in exports (Keat, Young & Erfle, 2013).

The information in the table highlights the impact of Asian foreign markets and the growing. China and Japan have been indifferently on the top position and has seen to takeover Unites States in the years stated (dfat.gov.au., 2016). There is no percentage, so the drawback lies in accurate comparison between countries amongst the distribution of export markets.

Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.

The regression results of a study on the determinants of the Kenyan exports by Orindi (2010) indicated that explanatory variables namely, the importer’s GDP and population provided most of the explanatory power in the regression. The coefficients of these variables had positive signs consistent with the theoretical expectations. The positive coefficient for the importer’s GDP is due to the fact that as income levels of the importing country increases, so does the country’s demand for imports. The Kenya’s GDP and population were found to be insignificant in the model and hence the two variables were dropped out of the regression model. The distance variable was found to be significant at 5% and had negative sign as was expected. In this study, the distance had been factored in as the proxy for the transportation costs. The distance in this case had inverse relationship with exports. This implied that the further away from the Nairobi the importing country is located the higher the transportation costs. High transportation costs have negative effects on the exports. However the author did not take into consideration of the fact that there are countries which are nearer to Kenya and yet exports to these countries from Kenya are less than countries that are far away from Kenya. This implies that the level of trade between countries that have close proximity will be influenced by other factors such as; income, trade agreements, and similar